An import tax could raise car prices by thousands

Justin Sullivan / Getty Images

Cars wait in line to enter the United States at the San Ysidro Port of Entry on January 27, 2017 in Tijuana, Mexico. U.S. President Donald Trump announced a proposal to impose a 20 percent tax on all imported goods from Mexico to pay for the border wall between the United States and Mexico. Such a border tax could constrain auto industry and cause spike in new car prices.

Cars wait in line to enter the United States at the San Ysidro Port of Entry on January 27, 2017 in Tijuana, Mexico. U.S. President Donald Trump announced a proposal to impose a 20 percent tax on all imported goods from Mexico to pay for the border wall between the United States and Mexico. Such a border tax could constrain auto industry and cause spike in new car prices. (Justin Sullivan / Getty Images)

Mark PhelanDetroit Free Press

Proposals for a border tax to pay for a wall with Mexico and encourage increased manufacturing in the U.S. would add hundreds to thousands of dollars to the cost of every car and truck sold here, including those assembled in American factories.

There's even a risk the tax could raise prices and reduce sales so much that the U.S. loses manufacturing jobs, according to the Motor Equipment Manufacturers Association, the umbrella group for several supplier associations representing 1,000 companies.

Analysts, associations and experts say the tax could add $2,000 to $2,500 to the average cost of a vehicle sold in the U.S.

"This is a price increase, and the consumer will bear an awful lot of the burden," Michigan State University professor of economics Charles Ballard said. "There are things you can do with a scalpel that might create jobs, but if you use a meat ax, you're likely to do harm. I'm afraid in one or two years we'll wake up to the recognition that this policy had many unintended consequences."

The supply chain for parts and vehicles made in the U.S., Canada and Mexico is among the most closely integrated in the world. Some raw materials components cross borders many times in the manufacturing process, potentially being taxed repeatedly before a finished vehicle ships to the dealership, said David Andrea, vice president for research at the Center for Automotive Research.

For instance, a piece of steel might be taxed when it enters the U.S. to be made into a screw. The screw would be shipped to Mexico to fasten the box for electronic controls. That box then comes to Michigan to be attached to a V-8 engine. Then the engine goes to Mexico where it's installed in a pickup that is shipped to a dealership in Atlanta. The result: a single part that has been taxed multiple times, with each time increasing the cost of an engine made in Detroit and a vehicle sold in Georgia.

Parts plants in the U.S. also make many components for vehicles built in Mexico. A study by the Center for Automotive Research(CAR) found that 40.3 percent of the content of vehicles built in Mexico in 2015 came from the U.S. CAR said U.S.-built vehicles average 11.7 percent Mexican content. Tens of thousands of American manufacturing jobs depend on parts used in Mexican plants, according to the CAR report.

"Affordability of new cars is already a concern," Autotrader senior analyst Michelle Krebs said. "The cost of goods and services, including new and used vehicles, have far outpaced incomes, which have been flat. Prices of new cars have risen 35 percent, used cars 25 percent and the consumer price index nearly 60 percent since 1997, while wages have stagnated or slipped. In 1990, average income was about $53,000; now it's about $54,000."

The average cost of a new vehicle hit a record high near $35,000 early in 2017.

It's impossible to predict the import tax's effects precisely, because proposals range from 20 percent in the House of Representatives to 35 percent by President Donald Trump, but every vehicle made and sold in the U.S. would be subject to it, because automakers and suppliers build parts as well as vehicles around the world.

Even the most "American made" vehicles can use parts imported from outside the U.S. and Canada for a full 20 percent of their value, according to figures from the National Highway Traffic Safety Administration. Canadian parts are considered domestic under a series of trade agreements dating to 1964. But the proposed border taxes could end that, making even more parts subject to the new tariff and raising prices further.

"Parts suppliers are concerned. The tax could have a negative effect," said Julie A. Fream, president and CEO of the Original Equipment Suppliers Association, which represents more than 450 parts makers ranging from small businesses to global megasuppliers. "There could be increased cost to customers or decreased capital for investment and product development."

Parts for service and repairs would also be taxed, increasing the expense of owning and maintaining a vehicle, particularly for low-income drivers of older vehicles.

"The average price for a vehicle could go up $2,000 for every American," said Cody Lusk, president of the American International Automobile Dealers Association. "That's $100 a month if you finance the car. It's a recipe for disaster for the American economy."

GM and several other automakers have said Trump's exhortations won't affect their investment and production plans.

Closely integrated automaking among the U.S., Canada and Mexico has been a fact for decades, but it became a political football in the last election. Mexico built 1,913,419 cars and trucks sold in the U.S. in 2016, 11.07 percent of total sales, according to Wardsauto. Canada built 1,894,624 - 10.85 percent. Plants in America built 9,802,183 vehicles sold here, 56.13 percent of total U.S. vehicle sales.

"Companies that rely on global supply chains would face huge business challenges caused by increased taxes and increased cost of goods, which would, in turn, likely result in reductions in employment, reduced capital investments and higher prices for consumers," Mark Scarpelli, chairman of the National Auto Dealers Association, wrote in a letter to the House Ways and Means committee. NADA represents 16,500 auto dealers from all brands.

The tariff might also reduce corporate profits as some companies absorb part of the additional cost instead of passing it all on to their customers.

Alan Baum of consultant Baum and Associates ran simulations of the effect the tax might have on prices for different automakers. Ford prices could rise $282, GM $995, Honda $1,312, Fiat Chrysler $1,672, Toyota $2,651 and Nissan $2,298. Increases for all vehicles range from 1 percent to more than 20 percent of the sticker price.

GM CEO Mary Barra expressed concern about the effect of a border tax last week, saying, "If not done very carefully, it could be very problematic."

AIADA's Lusk said that "even the House proposal of a 20 percent tax is an enormous cost that will be passed on to consumers and severely affect the auto industry." The association represents 9,500 franchises of foreign-based automakers across the U.S., including many that also belong to NADA.

Auto investment in Mexico has increased recently as Japanese and European automakers build new plants, but Fiat Chrysler, Ford, Nissan and Volkswagen have had Mexican plants since the 1960s. GM opened its first in 1981.

Seven of the 19 passenger-vehicle assembly plants currently operating in Mexico opened before NAFTA became law in 1994.

Suppliers initially used Mexico for parts that require lots of labor but don't cost much, like bundles of wire. Those plants tend to cluster close to the U.S. border, while other plants that make more complicated parts are often near the assembly plants.

There's a risk of retaliation if the U.S. unilaterally imposes a tax on imports from Mexico and other countries. Mexico has already warned it will refuse to renegotiate the North American Free Trade Agreement if the U.S. imposes tariffs. Other countries might respond by slapping their own tariffs on U.S. products.

While NAFTA's critics blame the trade agreement for job losses, the UAW will evaluate a tax's effect on the overall economy before taking a position on the issue. The UAW believes ineffective Mexican unions that don't push for better pay and benefits are a bigger problem than free trade.

Some manufacturing work has already returned to the U.S. Ford moved production of medium-duty trucks from Mexico to Ohio a couple of years ago. A few more products are likely to come back, with or without the tariff, but many analysts say U.S. vehicle sales, production and employment have peaked for the foreseeable future after big gains following the Great Recession.

If that's the case, the border tax could lead to higher prices for all American consumers without creating any jobs.

Other than the ranking below, no list showing what vehicles have the most content from specific other countries is available, but the major automaking nations - Germany, Great Britain, Japan and Korea are likely leaders, along with Canada and Mexico, which, with the U.S., comprise the integrated North American auto production network.

A version of this article appeared in print on March 19, 2017, in the Rides section of the Chicago Tribune with the headline "Border tax imperils car sales - Carmakers and parts companies say tariff would raise prices, threaten jobs" —
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